NPV Proforma

Example: Data:
Assume we buy a machine for 40, scrap value of 10, life of 3 years Outlay 40
Sales are 100 in year 1 increasing by 10 per annum Scrap 10
Gross profit margin BEFORE depreciation is 20% Life 3
Working capital of 10% of sales needs to be in place at the beginning of each year
Cost of capital is 10%
Tax is 30% payable one year in arrears
Depreciation Working cost 40 less scrap 10 =
0 1 2 3 4 life 3
Outlay -40 =
Scrap 10
Op cash flows working*** 0 1 2 3
Operating cash flows 20 22 24 Sales 100 110 120
Tax on op cashflows -6 -6.6 -7.2 GP BEFORE dep 20 22 24
Operating cash flows 20 22 24
Working capital -10 -1 -1 12
** NB could be given cash flow information in the form of profit margin
AFTER depreciation and would therefore have to add back depreciation,
Net cash flows -50 19 15 39.4 -7.2 or you may just be provided with contribution.
Discount factor 1 0.909 0.826 0.751 0.683
PV -50 17.271 12.39 29.5894 -4.9176
NPV 4.3328 Working capital working
0 1 2 3
For IRR calculation, try 20%: Total required -10 -11 -12
Net cash flows -50 19 15 39.4 -7.2 Incremental working capital -10 -1 -1 12
Discount 20% 1 0.833 0.694 0.579 0.482
PV -50 15.827 10.41 22.8126 -3.4704
NPV -4.4208

** in the exam for IRR you need to show

your workings using the ABANANA-NB
formula
 ** in the exam for IRR you need to show
your workings using the ABANANA-NB
IRR** 15% formula
30
3
10